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The degree of ease and certainty of value with which a security can be converted into cash.
The ability of a business to meet its obligations as they come due; the more liquid a business is, the better able it is to meet short-term financial obligations.
Liquidity ratios are measurements used to calculate the degree of a company's liquidity. Some common liquidity ratios and the formulas for calculating them are as follows:
- Accounts receivable turnover = Total credit sales divided by average accounts receivable
- Accounts payable turnover = Total credit purchases divided by average accounts payable
- Inventory turnover = Total cost of sales divided by average inventory
- Acid-test = Cash plus securities plus accounts receivable, divided by current liabilities
- Current ratio = Current assets divided by current liabilities
- Working capital = Current assets minus the sum of current liabilities